Hello all:I am new to shorting, just got my margin account today.I searched the MF message boards and found no subject that seemed to match this:I noticed MF seems to believe in two things - holding long positions and also shorting some stocks (no day trading or options, etc.).I have 2 questions about shorting:1) How long do you personally keep your average short position in a stock. Is it usually a matter of hours, days, months?Does your broker charge interest on your short stock? How does that work. I'm with DLJDirect, and found no specific info about interest or other hidden monetary costs in shorts. Any input is greatly appreciated.Pez
1) How long do you personally keep your average short position in a stock. Is it usually a matter of hours, days, months?A few months. Short-term movements can never really be predicted with any accuracy. However, since you can make only 100% shorting (and hypothetically an infinite amount long) holding shorts for years IMO is not wise because you can only make so much on a short. Anyways, stock prices reflect the results of the firm's operations and..... a few months should be long enough for the world to realize what operating results the firm is achieving.--Bruce
To answer you questions, first the easy one:Does your broker charge interest on your short stock? Yes, all brokers charges you interest since shorting is done on margin, you will be charged whatever the margin interest rate is to maintain the short. And they don't pay you interest on the proceeds of the short, unless you have a mega bucks account and can leverage special considerations.Now for the hard one:1) How long? There are no hard and fast rules on this one. Shorting is generally a short term thing, you set a limit (loss and profit) and exit when the price hits either one. With a short, you have a ton of risks against you as long as it is open: it might attract a takeover, it might have "good news", etc.Too illustrate, I have a friend that shorted PTVL around May/98 at 32, saw it go to 9 in Oct but he was greedy and wanted to save the commission by nailing a "short to zero". He barely got out even last month, when PTVL announced a merger.Moral of the story, "Bulls make money, Bears make money, Pigs get slaughtered".
[OT:] Does your broker charge interest on your short stock? "Yes, all brokers charges you interest since shorting is done on margin, you will be charged whatever the margin interest rate is to maintain the short.No. They don't. I would be surprised to hear of any major broker that does. --starling
>>broker charge interest on your short stock<<short answer is.some do, some don'tpersonally i wouldn't do business with one that does.after all they (you) are holding the money from the sale.even though none allow you to trade against that equity value.jazbo
Thanks for all your input. Here's another question for you:Do you tend to short on fundamentals (you believe based on earnings, etc., that they will not make their numbers next quarter) or do you mostly just "pile on" (ex: when there's bad news or something and people sell out of a stock you short the stock)The reason I ask is because last Friday I might have shorted a stock based on *anticipated* news and covered Monday for a quick killing. Is this how you tend to do it?
Too illustrate, I have a friend that shorted PTVL around May/98 at 32, saw it go to 9 in Oct but he was greedy and wanted to save the commission by nailing a "short to zero". He barely got out even last month, when PTVL announced a merger.Yeah, things like that happen. That's why the key to shorting IMO is to have staying power--and I'm talking about financial as well as emotional. If you don't have the financial resources to take huge losses then you probably shouldn't short. If you don't have the conviction to be down 50% you probably shouldn't short. I was down 115% on SNRS before it ultimately collapsed. I find the crappier companies tend to be more volatile--thus, are therefore more likely to be run up on pure speculation. The only way to win this game is to be able to stand out the storms the sometimes occur. (JMO)-Bruce
Do you tend to short on fundamentals (you believe based on earnings, etc., that they will not make their numbers next quarter) or do you mostly just "pile on" (ex: when there's bad news or something and people sell out of a stock you short the stock)I never short on "news". Though, sometimes a particular news item is IMO a catalyst for the stock to go down. An inflection point so to speak. (examples: When Cisco reported great earnings in the summer that was a catalyst for the networking and other Internet infrastructure firms to go up--they haven't stopped since. Back earlier in the year--when Amazon announced in the earnings report that they expected further losses--that was a catalyst to go short.) I'd say I basically try to short with a big emphasis on relative strength backed by fundamentals. I don't try to invent the wheel--I wait for a stock that is already broken. As for charts, I use charts to tell me what has happened with the stock never what will happen. I rarely short on valuation and I never never ever short great companies--something I learned after a rather painful lesson.
"all brokers charges you interest since shorting is done on margin, you will be charged whatever the margin interest rate is to maintain the short. "Umm, I haven't paid a penny of margin interest this year. You are misinformed about this, and if you are paying margin interest on shorts you're being ripped off. Why would anyone pay interest for giving the broker free money (short proceeds) to lend to longs or be safely kept in the money market?
You are misinformed about this, and if you are paying margin interest on shorts you're being ripped off. Like the Jaz sez, some do and so don't. I haven't shorted in quite a while, I *believe* Datek was charging me interest on the short margins. But again, I' not 100% on this. If I am wrong, I apologize to anyone I may have mislead.
Jazbo wrotepersonally i wouldn't do business with one that does. after all they (you) are holding the money from the sale. even though none allow you to trade against that equity value.Just thought I'd pipe in with my two bits. I work for a custodian bank for institutional investors (mutual funds, pension funds, insurance companies). As a result we have a nice collection of securities in custody on behalf of our clients. We lend them out to make some bucks for our clients and ourselves. When a broker comes to us (not me, I don't work in the securities lending department), and borrows securities, we don't do it out of the goodness of our hearts. We take cash or T-Bills as security for the loan, and the interest earned on that cash is ours and we keep it! Ha ha! The bulk goes to the institutional portfolios as "Stock Loan Income", and the rest is ours for providing such a useful service. So no, you don't "have" the cash proceeds of your short sale. We have them and we get the interest! You get your cash back when you return the shares, which is why the cash shows up as it does on your brokerage statement. It is "on deposit" with us as security for the loan you made.This may seem odd, but the reason for it is made clear when you look at what happened in Malaysia. The government there got scared and banned FOP (free-of-payment) or non-market securities transfers. That basically means you can only trade--buy or sell versus payment in the market. You can't borrow shares to short or return borrowed shares after a buy-to-cover because that is not a for-payment market transfer of securities (buy or sell). It is a free-of-payment non-market transfer of securities. Thus, we never got back the shares we loaned. Oops! Sorry, important institutional client, we lent your shares out to speculators and now we can't get them back. We'll book the sell to your account for the shares we lent versus the cash we held as security for the loan. If, for any reason, you are unsatisfied with this, please forward all complaints to the Government of Malaysia.This leads to the topic of risk management. When you call up your broker (oops, I mean place an order online) asking to short Bubble.com and you find that no shares are available, it obviously can't mean that no shares are available. It simply means that the brokers and custodians holding these shares won't lend them out. Their potential reward is the interest they'll earn off the cash proceeds of your short sale, which they'll demand of you as security for the loan. Their potential risk is that you'll be insolvent in a week and have to sell a kidney to make your margin call.Just my two bits,WeldonM in Toronto
WeldonMGreat post! Thanks, for the insight into the mechanics of loaned share for a short sale. Always plenty of learning opportunities on the Motley Fool message boards.Thanks, Jim
<< I *believe* Datek was charging me interest on the short margins. >>Only if you had no cash in your account. Look, if you have $10K in your account and you short $10K worth of something, they do not charge interest.
say todd,long time no hear.what you been up to.?jazbo
<< what you been up to.? >>Setting up an automated system to thrash the TMF web site when they f with me.Did you notice that Island is totally screwed up today? I am afraid to trade because of it. I really wanted to hop on ASKJ.
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